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London’s Square Mile, the centre of the UK’s financial services industry, has long been a pro-European axis in a country often uncomfortable with the nature and pace of European integration. But with the drift of EU policy looking increasingly inimical to the interests of the City of London, could this be about to change?

To some extent it already has. For many years a senior debt banker argued vociferously that the British attachment to sterling risked squandering an opportunity for UK PLC to gain smooth, uncomplicated access to the European investor base in the bond market. But in light of the events of recent years he has cheerfully reversed that position and not just on the basis that the British exchequer has dodged a bullet from southern Europe.

European investors, it turns out, quite like the currency diversification offered by sterling: only two weeks ago, the head of fixed-income trading at BNP Paribas told Financial News that being a leader in the European market was contingent on having a strong sterling franchise.

People on both sides of the issue acknowledge that the European project is not just about the euro – but also about being part of a wider debate. Earlier this month Richard Gnodde and Michael Sherwood, the co-chief executives of Goldman Sachs International, argued persuasively in The Times that the City benefits from investment by global financial services firms because it is viewed as a gateway to the EU. They argued the benefits would slowly disappear should Britain secede from the Union. At the same time, an isolated UK would find its influence diminished on the world stage: “Britain’s voice is amplified when it works with its European partners”, they wrote. http://bit.ly/XBtnUI

But what if the UK’s partners don’t listen to its arguments? Unless more countries join Britain, the Czech Republic and Sweden in opposing a stringent cap on variable pay as part of the package of measures in the Capital Requirement Directive IV, it looks certain that the way bankers are compensated is to change radically.

While a wholesale move to New York or Hong Kong to evade this is highly unlikely, concerned observers point out that banks may simply choose to pay much larger upfront salaries. This would cut the link between remuneration and performance and make banks much less nimble in their ability to reduce compensation in the event of a downturn, in turn making them less stable.

This, of course, is most pertinent to London, the EU’s biggest financial centre, and while European politicians are entitled to a principled stance on bonuses, could it be that there is a permanent misalignment of the City’s interests and the policy priorities of our European partners?

The European legislative process, to misquote Carl von Clausewitz, is the continuation of diplomacy by other means and on the bonus issue the UK looks to have been outmanoeuvred. One expert on EU politics said that Germany – which, it was widely hoped, would oppose a bonus cap – has decided to oppose Britain in the interests of Franco-German relations. Having taken a hit on the issue of the EU budget, on which Germany sided with the UK, that friendship is now being tended by a united stance on compensation.

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It makes perfect political sense, but is this the way the City wants to be governed? And why is compensation even being considered as part of the legislation bringing the Basel III standards on capital and liquidity into law? Proponents of a cap say bonuses should not be allowed to delay that crucially important process but the counter to that is to separate the two issues.

Making the long-awaited application of new capital standards contingent on a settlement about pay that’s clearly against the City’s interests might finally start to change minds on Europe in London. Will hitting bankers where it hurts risk losing the EU its most powerful British friends?